taf 1q report and letters

8/2/2019 TAF 1Q Report and Letters

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Third Avenue Value Fund

Third Avenue Small -Cap Value Fund

Third Avenue Real Estate Value Fund

Third Avenue International Value Fund

Third Avenue Focused Credit Fund

PORTFOLIO MANAGER COMMENTARY

AND F IRST QUARTER REPORT

JANUARY 31, 2012


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This publication does not constitute an offer or solicitation of any transaction in any

securities. Any recommendation contained herein may not be suitable for all investors.

Information contained in this publication has been obtained from sources we believe to be

reliable, but cannot be guaranteed.

The information in these portfolio manager letters represents the opinions of the individualportfolio manager and is not intended to be a forecast of future events, a guarantee of

future results or investment advice. Views expressed are those of the portfolio manager and

may differ from those of other portfolio managers or of the firm as a whole. Also, please

note that any discussion of the Funds holdings, the Funds performance, and the portfolio

managers views are as of January 31, 2012 (except as otherwise stated), and are subject

to change without notice.

Third Avenue Funds are offered by prospectus only. Prospectuses contain more complete

information on advisory fees, distribution charges, and other expenses and should be read

carefully before investing or sending money. Please read the prospectus and carefully

consider investment objectives, risks, charges and expenses before you send money. Past

performance is no guarantee of future results. Investment return and principal value will

fluctuate so that an investors shares, when redeemed, may be worth more or less than

original cost.

If you should have any questions, please call 1-800-443-1021, or visit our web site at:

www.thirdave.com, for the most recent month-end performance data or a copy of the Funds

prospectus. Current performance results may be lower or higher than performance numbers

quoted in certain letters to shareholders.

M.J. Whitman LLC, Distributor. Date of first use of portfolio manager commentary:

March 1, 2012.


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This booklet consists of two separate documents.

THIRD AVENUE FUNDS

PORTFOLIO MANAGER COMMENTARY_____________________________________________

CHAIRMANS LETTER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

THIRD AVENUE VALUE FUND (TAVFX, TVFVX) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

THIRD AVENUE SMALL-CAP VALUE FUND (TASCX, TVSVX) . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

THIRD AVENUE REAL ESTATE VALUE FUND (TAREX, TVRVX) . . . . . . . . . . . . . . . . . . . . . . . . . . 19

THIRD AVENUE INTERNATIONAL VALUE FUND (TAVIX, TVIVX) . . . . . . . . . . . . . . . . . . . . . . . . . 27

THIRD AVENUE FOCUSED CREDIT FUND (TFCIX, TFCVX). . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

THIRD AVENUE FUNDS

FIRST QUARTER REPORT_____________________________________________

THIRD AVENUE VALUE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

THIRD AVENUE SMALL-CAP VALUE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

THIRD AVENUE REAL ESTATE VALUE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

THIRD AVENUE INTERNATIONAL VALUE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

THIRD AVENUE FOCUSED CREDIT FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

NOTES TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20


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Dear Fellow Shareholders:

The Third Avenue investment team approaches securityanalysis from a different perspective than most conventionalsecurity analysts. In fact, the Third Avenue approach has

more in common with corporate finance than it does withthe conventional approach. The conventional approach isaccepted as basic tenets by Modern Capital Theory(MCT), in Graham and Dodd valuations (G&D) and,to some extent, in Generally Accepted AccountingPrinciples (GAAP). The differences between conventionalsecurity analysis and other financial analysis bottom onconventional security analysis over emphasis of three factorsand consequent under emphasis of other factors that areequally important, and even more important, in mostfundamental financial analyses. These other areas of financeinclude running a private business, control investing, mostof distress investing, credit analysis and venture capital. Thethree factors overemphasized in conventional securityanalysis are as follows:

1) Primacy of the Income Account, i.e., the primacy of

flows generated from operations as a valuationdeterminant whether those flows are earnings flow orcash flows. (Earnings flows are streams of income whichcreate wealth for economic entities while consumingcash. In the corporate world earnings flows probably aremore common than cash flows available for securitiesholders).

2) Primacy of Short-Termism Prediction of, and

reliance, on immediate market prices and changes inthose prices; these are crucial to equity pricing insecurities markets dominated by Outside PassiveMinority Investors (OPMIs). Determining near-termoutlooks for a company tends to be a much moreimportant variable in conventional analysis than isdetermining underlying value.

3) Primacy of Top Down Analysis The mostimportant element in predicting market prices inconventional analysis are macro factors such as GrossDomestic Product (GDP), the level of interest rates,technical market considerations, industry sectors andthe trends in stock market indices. For conventionalanalysis, micro factors looked at from the bottom-up,such as loan covenants, appraisals of management,strength of financial positions and access to capital

markets are down-weighted compared to top-downconsiderations.

As to the primacy of the income account, G&D recognizedcertain of its shortcomings, even though the most importantcomponent of their bottom-up analyses was forecastingfuture earnings. As G&D stated on Page 551 of the 1962edition ofSecurities Analysis, Principles and Technique:

Most of all security analysts should reflect fully onthe rather startling truth that as long as a businessremains a private corporation or partnership the netasset value appearing on the balance sheet is likely toconstitute the point of departure for determining whatthe enterprise is worth. But once it makes itsappearance as a publicly held company even thoughthe shares distributed to the public may constitute

only a small part of the total the net-worth figureseems to lose virtually all its significance. Value thenbecomes dependent almost exclusively on the expectedfuture earnings

This overemphasis on forecasting future flows fromoperations (whether earnings flows or cash flows) would be

Letter from the Chairman(Unaudited)

MARTIN J. WHITMANCHAIRMAN OF THE BOARD


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justifiable in the real world of fundamentalism, i.e., financial

activities other than stock market trading, if the businessesbeing analyzed were strict going concerns; financed as theyalways have been financed; managed by operators in thesame way they have always been managed; not subject totakeovers; mergers, going private or other resourceconversion events; and without needs to ever access capitalmarkets. The problem is that there are very few, if any, suchcompanies whose common stocks are publicly traded in

existence. Rather than being strict going concerns, virtuallyall businesses whose equities are publicly traded combinegoing concern characteristics with investment companycharacteristics. While income accounts, i.e., flow data, areintegrally related to net asset value (NAV), for manycompanies NAV and changes in NAV are far moreimportant determinants of value than are earnings, or cashflows, from operations. Such NAV-centered companies

include Berkshire Hathaway, most mutual funds, mostincome-producing real estate entities (such as Forest CityEnterprises), most control investors (such as BrookfieldAsset Management), and most conglomerates (such asCheung Kong Holdings). In conventional analysis,managements are appraised almost exclusively as operators.In the real world, in which Third Avenue operates,managements are appraised not only as operators but alsoas investors and financiers. Management roles as investorsand financiers are frequently more important than theirroles as operators in our analysis.

Even when emphasizing the primacy of the incomeaccount, many conventional analysts handicap themselvesby failing to consider the importance of NAV in manyinstances as a tool for predicting future earnings. Grahamand Dodd, for example, believe that the past earnings record

is the best tool for predicting future earnings, virtuallyignoring NAV. However, NAV is an essential tool (thoughnot the sole tool) for predicting future earnings in thoseinstances where data on Return on Equity (ROE) areimportant to understanding a business. E, or Equity, bythe way, is NAV. Industries where ROE becomes a tool forpredicting future earnings include income producing real

estate, commercial banks, insurance companies, investment

companies, conglomerates and hedge funds. The vast bulkof Third Avenues common stock investments are incompanies where the NAV figure is an important valuationtool. Most of the issues acquired by Third Avenue Fundshave been acquired at prices that represent meaningfuldiscounts from estimated NAVs.

Third Avenues approach to finding values seems to be a lotmore broadly based than is the case for conventional stockmarket analysis. In this regard, Third Avenue seems to bein good company. Others more broadly based in theiranalyses include those running private businesses, mostdistress investors, virtually all control investors, most creditanalysts and virtually all first and second stage venturecapitalists.

Factors considered by Third Avenue and these other

economics analysts in appraising a company and itssecurities encompass the following:

1) Credit worthiness

2) Flows both cash and earnings

3) Long-term outlook

4) Salable assets which can be disposed of withoutcompromising much, or at all, the going concern

dynamics.

5) Resource conversions such as changes in control,mergers and acquisitions, going private, and majorchanges in assets or major changes in liabilities.

6) Access to capital markets both credit markets andequity markets.

In general, there probably is no primacy of anything. If

anything, since the 2007-2008 economic meltdown, forThird Avenue there has been a primacy of credit-worthinessin analyzing any equity security. At Third Avenue therenever has existed a Primacy of Earnings, a Primacy of Short-Termism or a Primacy of Top-Down Analysis.

Letter from the Chairman (continued)(Unaudited)


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It seems important to define credit-worthiness, both for

private sector analysis and the analysis of sovereigns. Credit-worthiness has three elements:

1) Amount of indebtedness

2) Terms of indebtedness

3) How productive are the Use of Proceeds this thirdfactor is usually the most important.

It ought to be noted that in the aggregate, indebtedness isalmost never repaid by entities which remain credit-worthy.Rather, maturing debt is refinanced and new levels of debtare incurred as credit-worthy entities expand and becomemore productive. Despite the 2008-2009 economicmeltdown, most of the companies held since then in ThirdAvenue portfolios have grown and prospered, e.g., the HongKong Holdings, Brookfield Asset Management and Posco.Today each of these companies has considerably moreborrowing capacity than they had when the positions wereinitially acquired by Third Avenue.

A primacy of earnings approach clearly is in conflict withthe desire of most corporations to minimize income taxburdens. Income from operations are taxed at maximumcorporate rates. Taxation of capital gains is much preferred,because the taxpayer usually can control the timing as to

when the tax becomes payable. And the ultimate corporatetax shelter for businesses which dont need cash return isunrealized appreciation.

In conventional analyses today, there is almost nounderstanding of risk. The prime example of this is theconventional belief that long-term U.S. Treasury Notes,selling near par, are safe and free from risk. Not so. The U.S.Treasury Notes, paying say 2%-3%, do not carry any credit

risk; but, they are replete with several other types of risk, e.g.,inflation risk and capital deprecation risk, while at the sametime there are no prospects for capital appreciation. The hugeamounts of realistic risk inherent in owning U.S. Treasuriestoday is offset greatly if the portfolio holding theseinstruments is a dollar-average and will continue to acquirenew U.S. Treasuries as interest rates fluctuate. Nonetheless,

for most portfolios in 2012, the way to guard against

economic risk is to be a total return investor in things such asThird Avenue Funds, rather than to be a cash return investorin U.S. Treasuries.

The common stocks in Third Avenue Funds almost all havethe following characteristics:

1) The companies enjoy super strong financial positions,which provide insurance to investors and

opportunism to management2) The common stocks were acquired at prices that

represent meaningful discounts from estimated NAVs.

3) The companies provide comprehensive, relativelycomplete, disclosures and operate in markets whereregulators provide significant protections for minorityinvestors.

4) The companies seem to have excellent prospects forgrowing NAV by not less than 10% compoundedannually over the next three to seven years.

Short-termism is rampant among market participants.Much of short-termism is appropriate, justifiable andessential for many market participants. It just happens tobe irrelevant largely for Third Avenue, which focuses mostlyon buy-and-hold, long-term investments.

One had better be very short-term conscious where theportfolio is highly leveraged; where the market participantdoesnt know much about the company or the securities itissues; where the market participant uses trading systems,or a technical approach to the market; and where the moreimportant variable in an analysis is what is the near-termoutlook, rather than what are the underlying values existingin the company and the companys securities.

Even for the largest institutions, it seems to be impossibleto have underlying knowledge about an individual securitywhere the portfolio consists of a huge numbers of securities(say over 500 different common stocks); and those securitiesare traded frequently. This includes high frequency tradingportfolios. If thats where ones interest and attention lies,



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one should be short term. This is not what TAM does. TAM

believes in limited diversification. Diversification is only asurrogate, and usually a damn poor surrogate, forknowledge, control and price consciousness. TAM has tobe moderately diversified, because the various Third AvenueFunds are essentially passive, rather than control, investors.

Also, there are certain types of securities I call themsudden death securities where all the focus has to beshort term. These securities are derivatives and risk arbitragesecurities, with risk arbitrage being defined as situationswhere there will be a relatively determinant workout in arelatively determinant period of time, e.g., a publiclyannounced merger or tenderoffer.

Even Third Avenue is sometimesshort-term oriented, but not

most of the time. This occurswhere there is a resourceconversion event, such as amerger or tender offer, where theprice to be paid is a substantialpremium above the pre-announcement market price. Inthat situation, the Third Avenue fund manager tends tomake a market decision, rather than an investment decision.Although the price offered in the resource conversion maystill reflect a big discount from NAV, as long as it reflects asubstantial market premium, the Third Avenue fundmanager is likely to take his profit and move on tosomething else. Resource conversions do occur periodically.

For analysts who subscribe to the G&D approach toinvesting, there is nothing more important in an analysis

than to give dominant weight to top-down predictions ofthe outlook for the economy and the outlook for specificsecurities markets. Third Avenue, on the other hand, doesnot ignore top-down considerations but certainlyunderweights their importance compared with bottom-upconsiderations. For this, there are two reasons. First, overthe long term bottom-up analysis will tend to be a much

more important factor in value realization than top-down

factors (probably absent social unrest). Second, ThirdAvenue, like everybody else, doesnt seem to be too accurateas a top down forecaster, especially when it comes to short-term forecasts.

A good example of how we meld the top-down with thebottom-up lies in the reasoning behind our investments inHong Kong, China and South Korea. The top-downanalysis centers on the belief that over the next three toseven years, that part of the world will grow faster than therest of the industrialized world, especially Europe and NorthAmerica. The bottom-up analyses center on the facts that

the businesses in which ThirdAvenue has invested are all eminentlycredit worthy; that the commonstocks were acquired at significantdiscounts to our estimate of NAV;

and that the common stocks are theissues of companies that providecomprehensive, written, disclosures;and are regulated by governmentagencies whose principal interestseems to be investor protection.

Prior to 2008, long-term, buy-and-hold investors did nothave to pay too much attention to top-down factors, suchas the business cycle. This no longer seems true. Since themeltdown, business cycle factors seem to have become moreimportant than had been the case from the end of WorldWar II until 2008. Despite this, Third Avenue will continueto give more weight in the vast majority of its analyses tobottom-up factors, rather than top-down factors.

PROMOTION OF IAN LAPEY TO SOLE MANAGER OF

THIRD AVENUE VALUE FUNDAs many of you know, I entered the mutual fund businesswhen I was 67 years old and having a pre-determinedsuccession plan has always been very important to me, sothat I can be assured that my family and fellow shareholdersmoney will be managed by someone I can depend upon


Ians promotion is welldeserved. I have the utmost

confidence in him. My familyand I will remain significantshareholders in Third Avenue

Value Fund.


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long after I retire. To that end, I designated Ian Lapey as my

successor as manager of the Third Avenue Value Fund in2006. I have co-managed Third Avenue Value Fund withhim since 2009. Ian is a most adept analyst across industriesand asset classes and is a very capable value and distressedinvestor. Therefore, Ian was promoted to sole PortfolioManager of Third Avenue Value Fund, as of March 1, 2012.I have not retired. I remain Chairman of the Third AvenueTrust Board of Trustees and will continue actively

mentoring our research team. I will also manage a privateconcentrated value fund, available to accredited investors.

Ians promotion is well deserved. I have the utmostconfidence in him. My family and I will remain significantshareholders in Third Avenue Value Fund. I know that Ianwill always act in the best interest of our shareholders. Ian,of course, will continue to be supported by the same teamof portfolio managers and analysts who have supported me

for these many years.

I will write you again when we publish our reports for thequarter to end April 30, 2012.

Sincerely yours,

Martin J. WhitmanChairman of the Board



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At January 31, 2012, the unaudited net asset valueattributed to the 72,701,558 shares outstanding of the

Third Avenue Value Fund Institutional Class (TAVF,Third Avenue, or the Fund) was $44.26 per share. Thiscompares with an audited net asset value of $43.18 per shareat October 31, 2011, and an unaudited net asset value of$51.54 per share at January 31, 2011, both adjusted for asubsequent distribution to shareholders. At February 28,2012, the unaudited net asset value was $47.79 per share.

QUARTERLY ACTIVITY*

Number of Shares New Position

380,000 shares Devon Energy Corp. Common Stock(Devon Common)

Number of Shares Positions Decreased

532,700 shares Brookfield Asset Management Inc.Common Stock (Brookfield Common)

3,412,000 shares Cheung Kong Holdings Ltd. Common

Stock (Cheung Kong Common)

Number of Shares

or Principal Amount Positions Decreased (continued)

14,277,000 shares Henderson Land Development Ltd.Common Stock (Henderson Common)

273,000 shares Hutchison Whampoa Ltd. CommonStock (Hutchison Common)

674,579 shares Investor AB Common Stock

(Investor Common)

$127,000,000 MBIA Insurance Corp. 14% SurplusNotes (MBIA Surplus Notes)

279,037 shares Posco Common Stock(Posco Common)

1,545,000 shares Tejon Ranch Co. CommonStock (Tejon Common)

64,100 shares Toyota Industries Corp. Common Stock(Toyota Industries Common)

1,239,000 shares Wharf Holdings Ltd. Common Stock(Wharf Common)

Number of Shares Position Eliminated

2,190,000 shares Nabors Industries Ltd. Common Stock(Nabors Common)

PORTFOLIO MANAGEMENT TRANSITION

As of March 1, 2012, I will have the honor of assuming therole as sole portfolio manager of the Fund. I have had theprivilege of working side-by-side, for more than five years,with my mentor and former Co-Manager MartinWhitman. Marty has not retired. He remains Chairman ofThird Avenue Funds and will continue to be a source ofwisdom and advice for me and the entire 29 person

investment team at Third Avenue. During my nearly elevenyear tenure at Third Avenue, I have grown to understand,

Third Avenue Value Fund(Unaudited)

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* Portfolio holdings are subject to change without notice. The following is a list of Third Avenue Value Funds 10 largest issuers,and the percentage of the total net assets each represented, as of January 31, 2012: Henderson Land Development Co., Ltd.,13.96%; Cheung Kong Holdings, 11.10%; Posco (ADR), 9.11%; Wheelock & Co., Ltd., 5.63%; Toyota Industries Corp.,4.88%; Hutchison Whampoa, 4.85%; Brookfield Asset Management, Inc., 4.84%; Investor AB, 4.79%; Hang Lung Group, Ltd.,4.74%; and Covanta Holding Corp., 3.88%.

IAN LAPEYPORTFOLIO MANAGER OFTHIRD AVENUE VALUE FUND


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Third Avenue Value Fund (continued)(Unaudited)

appreciate and adopt Martys investment philosophy, which

he has espoused and published for many years and isingrained in all of Third Avenues talented analysts andportfolio managers. Some of the foundations of thisphilosophy include:

Focus on the balance sheet and readily ascertainablenet asset value.As Marty discusses in this quartersChairmans letter, conventional security analysis over-emphasizes the Primacy of the Income account. At

Third Avenue, we focus primarily on the balance sheetin valuing securities. We do not value securities basedon complicated models using projections that areinherently unreliable, but instead focus on readilyascertainable net asset value (NAV). That is, we typicallyvalue securities on an as is basis.

Only invest in common stocks issued by companieswith strong financial positions.A strong financialposition protects against permanent impairments ofcapital. It is our anchor to windward. It can enable acompany to choose when it accesses the capital marketsand thereby avoid issuing dilutive equity at inopportunetimes. Additionally, strongly-financed companies canbe opportunistic during periods of industry weaknessand make acquisitions at attractive prices or developnew products.

Focus on the long term. As Marty notes in hisChairmans letter, there is a Primacy of Short-Termismin conventional security analysis. Of course, this createsterrific opportunities for investors like us who are trulyfocused on long term capital appreciation. Often, ourbest opportunities are found in industries where thenear term outlook is poor.

Worry about investment risk, not market risk. ThirdAvenues focus is on the underlying businessfundamentals of our holdings and protecting againstinvestment risk the permanent loss of capital.Predicting the short-term swings in market prices is notone of our skillsets and not relevant for long-term,fundamental, bottom-up investors.

Do not try to pick the bottom. Since we cant forecast

market prices, we will buy when pricing is goodenough. If the price of a security falls after our initialpurchase we will usually average down, assuming thereis no change to the investment thesis.

Avoid industries in secular decline. Third Avenuesvalue investing approach differs from that of manyother value investors in that cheapness is never asufficient condition to purchase a security. We prefer

to be investing in businesses with healthy long-termgrowth outlooks and are willing to live through periodsof cyclical weakness, but try to avoid investing in dyingbusinesses.

Own the fulcrum security. Our strategy of investingin the most senior security in a companys capitalstructure that will participate in a reorganization hasproven successful. As creditors, it gives us two ways towin: 1) if the security remains a performing loan, wewill earn an attractive return (at least 15%); or, 2) if thecompany reorganizes, our security will participate in thereorganization, often being converted to equity uponemergence from bankruptcy. In a well-financedcompany, the fulcrum security is usually the commonstock. As equity holders, we will benefit from resourceconversions that may include share buy backs, spin offs,

sales of assets or a merger/acquisition.

Pay close attention to a management teams long-term track record and incentives. The hardest part ofour jobs as analysts is assessing management teams. Aslong term investors, the success of an investment willusually be determined by managements ability to growthe value of the business over time, often by beingopportunistic and utilizing the companys strongfinancial position to make attractive acquisitions orinvestments. In evaluating management teams wescrutinize proxy materials to understand how amanagement team is incentivized and place much moreweight on their long term track record than initialmeetings, which can be misleading. We preferconservative management teams to promotional ones

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and value insider ownership in fully vested common

shares as opposed to options.

These principles, many of which I discussed in thePrinciples of Value Investing section of the July 31, 2011shareholder letter, will continue to drive the Fundsmanagement going forward. There will be no change to theFunds investment strategy. I joined Third Avenue nearlyeleven years ago after reading aninterview with Marty Whitman in

which he discussed Third Avenuesinvestment philosophy. I wasparticularly impressed by the focuson the balance sheet, whichdiffered from the approaches ofsome other value investors. I willcontinue to follow this approach,although shareholders can expect

the portfolio to become more diversified over time.Nevertheless, it will still be more concentrated than mostmutual funds.

Third Avenues investment approach is often compared toa private equity-like approach to investing in publicsecurities. However, the Fund provides several advantagescompared to most private equity funds, including lowerfees, better pricing (the Fund sold for 0.8 times book value

at quarter end) and daily liquidity. The Funds private

equity-like approach has achieved its goal of outperforming,on average over the long term (11.5% annual return sinceits November 1, 1990 inception, versus 9.4% for the S&P500 and 7.2% for the MSCI World Index1). My goal as solemanager with the support of the entire 29 personinvestment team will be to continue this long-term track

record of outperformance.

PORTFOLIO OVERVIEW

In reviewing the currentpositioning of the Fund, it ishelpful to discuss the five primarycategories of investments: realestate, energy, publicly-tradedprivate equity, infrastructure andother deep value investments.

Real Estate 42% of the Funds net assets.

Our focus on readily ascertainable net asset value, as describedabove, has always viewed income-producing real estate as anattractive investment, when the security is available at asignificant discount from the underlying real estate. This iscertainly true today for our Hong Kong-based real estate andinvestment companies, as well as for Forest City EnterprisesCommon. The Funds real estate exposure is primarily in

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These principles ... willcontinue to drive the Fundsmanagement going forward.

There will be no change to theFunds investment strategy.

1 The Funds one-year, five-year average annual and ten-year average annual returns for the period ended January 31, 2012were -13.68%, -4.20% and 5.09%, respectively. Fund performance returns are net of fees and assume reinvestment ofdividends. Past performance is no guarantee of future results. Investment return and principal value will fluctuate so thatan investors shares, when redeemed, may be worth more or less than original cost. Current performance results may belower or higher than performance numbers quoted. Please call 1-800-443-1021, or visit our web site at: www.thirdave.com,for the most recent month-end performance data or a copy of the Funds prospectus. M.J. Whitman LLC, Distributor.The S&P 500 Index is an unmanaged index (with no defined investment objective) of common stocks. The S&P 500

Index is a registered trademark of McGraw-Hill Co., Inc. The S&P 500 Indexs one-year, five-year average annual andten-year average annual returns for the period ended January 31, 2012 were 4.22%, 0.33% and 3.52%, respectively. TheMSCI World Index is an unmanaged, free float-adjusted market capitalization weighted index that is designed to measurethe equity market performance of 23 of the worlds most developed markets. The MSCI World Indexs one-year, five-yearaverage annual and ten-year average annual returns for the period ended January 31, 2012 were -2.45%, -1.08% and4.99%, respectively. The Indices are not securities that can be purchased or sold, and their total returns are reflective ofunmanaged portfolios. The returns include reinvestment of interest, capital gains and dividends.


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commercial and residential real estate in Hong Kong and

China and, to a lesser degree, North America. Unlike manyother funds that invest in publicly-traded real estate securities,the Fund prefers real estate operating companies to real estateinvestment trusts, because real estate operating companiescan reinvest their earnings to grow net asset value.

Energy 12% of the Funds net assets

The Funds energy exposure consists primarily of:

Henderson Lands 40% stake in Hong Kong and ChinaGas; the common stock of Covanta Holding Corp, aleading waste to energy provider and the successor toDanielson Holding Corp; Brookfield Asset Managementshydroelectric power assets; and of the common stocks ofthree Exploration and Production companies (EnancaCorp, Cenovus Energy Inc. and Devon Energy Corp).The Devon Common position was initiated this quarterand is discussed in greater detail below.

Publicly-Traded Private Equity 10% of the Funds net assets

The Fund has two significant investments in companieswhose primary value is in their portfolio of publicly-tradedcommon stocks. Investor AB is a Swedish investmentcompany that is primarily invested in the publicly-tradedcommon stocks of large European companies such as: Atlas

Copco (industrial production equipment), AstraZeneca(pharmaceuticals), SEB (banking), ABB (power andautomation technologies) and Ericsson (communicationsequipment). Toyota Industries has a large portfolio ofJapanese common stocks, including a 6.9% stake in ToyotaMotor Common along with diversified manufacturingoperations that produce automobiles, engines, airconditioning compressors, materials handling equipment

(e.g., forklifts), textile machinery and logistics-relatedequipment. Investor AB Common and Toyota IndustriesCommon trade at historically wide discounts to ourestimates of net asset value of 35% and 40%, respectively,and prospects for NAV growth appear to be attractive.

Infrastructure 5% of the Funds net assets.

The Funds exposure to infrastructure consists primarilyof Hutchison Whampoas port operations in Asia andEurope and Brookfield Infrastructure Partners. BothBrookfield and Hutchison Whampoa are expected to makeadditional acquisitions of infrastructure assets, particularlyin Europe.

Other Deep Value Investments

25% of the Funds net assetsThese include: investments in the common stock of Posco,a leading Korean steel producer, that trades below bookvalue and at about nine times earnings; the common stocksof the Bank of New York Mellon and Key Corp., both ofwhich trade at significant discounts compared to net assetvalue; Fleetwood Homes, the second largest player in themanufactured housing industry, whose assets were acquired

in two separate bankruptcy auctions; and the commonstocks of several cash-rich high-tech companies (AppliedMaterials, Tellabs and Sycamore Networks).

REVIEW OF QUARTERLY ACTIVITY

During 2011, the Fund reduced its energy exposure, byselling its positions in the common stocks of CimarexEnergy Co. and Nabors Industries at premiums to their

current prices, at the time of this writing. Owing to therecent decline in natural gas prices, to about $2.50 per Mcfe(thousand cubic feet equivalent), the prices of manycommon stocks and bonds of natural gas producers havefallen. Fund Management has been reviewing severalopportunities in this sector and initiated a position inDevon Common in early 2012.

Devon Energy Corp. is an Oklahoma-based oil and gas

exploration and production company. We have beenfollowing Devon for several years, as Devon and Cimarex (acommon stock holding between 2007 and 2011) are theprimary two operators in the Woodford - Cana shale play inOklahoma. Devon has a very strong financial position, withcash and short-term investments of $6.8 billion, comparedto total debt of $9.3 billion. The companys management has

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an impressive long-term track record, as evidenced by its

annual growth of production and reserves per share(reasonable proxies for net asset value) at 8% and 11%CAGRs (compound annual growth rates), respectively, sincethe company went public in 1988. Management has beenwilling to sell assets when prices have been attractive, such asin 2009 and 2010 when it exited its Gulf of Mexico andinternational operations at about $45 per barrel of provedreserves compared to its current valuation at about $10. In

January, the company announced a joint venture agreementwith Sinopec, a Chinese energy producer, in which Sinopecwill pay a rich price for a one-third interest in five recentlydiscovered oil shale plays and pay 80% of the totaldevelopment costs through 2014.

Fund Management sold the vast majority of its remainingholdings in MBIA Surplus Notes during the quarter.Including interest received, the sales were made at a small

profit to the Fund. Other portfolio activity during thequarter was driven by portfolio considerations. As of theend of the quarter, the Funds cash position wasapproximately 4%.

CONTINUED HEALTHY BUSINESS PERFORMANCE FOR FUND HOLDINGS

As I noted in last quarters letter, there was a massivedivergence between the business and stock performance of

the Funds major holdings in 2011. Recently reportedresults for our holdings continue to be healthy, and, in somecases, the management teams are taking steps to try toimprove the highly discounted valuations of their commonstocks. Examples include the following:

Forest City Enterprises announced several steps thatshould reduce the discount at which its common stocktrades to net asset value. These include repositioning or

disposing of its land business, reducing debt andfocusing on its core commercial rental projects in corecities. Additionally, the company announced areduction in its board size and that it will publish aschedule of NAV components, which we expect tohighlight disparity between the current stock price and

NAV. These actions appear to have been driven by a

13D filing by Third Avenue Management LLC inOctober 2011.

Investor AB raised its dividend by 1 SEK, to 6 SEK pershare (4.5% yield), and noted that a steadily risingdividend in combination with lower operating costsmay well result in a structurally lower discount longerterm.

Posco reported an 11% decline in earnings in 2011, buta still healthy 10.7% operating margin in its steelbusiness, despite competitive industry conditions.Reported NAV increased by 6% (8% includingdividends), which, combined with the 24% stock pricedecline, resulted in a massive widening of the discount.Management indicated that it may pursue initial publicofferings for unlisted subsidiaries and sell marketablesecurities of non-core investments, such as the commonstocks of Korean financial companies. These actionsmay result in a narrowing of the common stocksdiscount to NAV.

Covanta reported strong 2011 results, including a 4%increase in revenues and 24% increase in earnings pershare (EPS). Free cash flow totaled $280 million (14%of the market capitalization), enabling the company torepurchase 10% of its outstanding shares and initiate aquarterly dividend (2% yield). The company alsoprovided healthy guidance for 2012, includingEBITDA and EPS growth of 5% and 15%, respectively.These results were well received by investors as CovantaCommon is up 20% year to date as of this writing.

The Bank of New York Mellon reported essentially flatearnings in 2011 and 3% and 8% increases in its core

two business metrics, assets under custody and assetsunder management, respectively. The companyrepurchased 2.6% of its shares in 2011 and initiated arestructuring plan, under new CEO Gerald Hassell,that started to generate benefits in the form of lowerstaff expenses in the fourth quarter (down 2% year overyear and 5% compared to the third quarter).

10


15/83


Hang Lung Properties reported that underlying profit

increased by 29% during the second half of the year,driven by 11% growth in leasing income (15% inChina and 7% in Hong Kong). The companys newlyopened (August 2011) shopping center in Jinan is100% leased and generating an impressive initial yieldof 7%. The Funds other significant Hong Kongholdings will be reporting second half 2011 results inMarch. These results are also expected to be strong.

TRIP TO HONG KONG AND CHINA DISCOUNTS NOT WARRANTED BASED ON BUSINESS CONDITIONS

I visited Hong Kong and Shenyang, China in late Januarythrough early February. This was my second trip to HongKong and China, although, in combination with otheranalysts at Third Avenue, we have now made more than 20trips to the region. I toured commercial and residentialproperties (owned by both our companies and theircompetitors) and had meetings with management teams,other investors, sell-side analysts and regulators. Businessconditions appeared to be quite healthy and very much atodds with the discounted valuations of the Hong Kong-basedcompanies whose common stocks are owned by the Fund.

Commercial real estate fundamentals in Hong Kongcontinue to be strong. I visited Harbour City, which is

owned by Wharf Holdings Ltd., whose common stockis held by the Fund. This remarkable shopping centeraccounts for more than 6% of all of Hong Kongs retailsales. The picture below shows the line of peoplewaiting to get in a Chanel store, at 3:00 p.m., on aWednesday afternoon.

The recent 5-15% correction in Hong Kong residentialproperty prices is probably healthy and does not seemlikely to be the beginning of a crash. Supply remainsrelatively low and underlying demand is strong, partiallyowing to continued demand from mainland China.The measures introduced by the government over thelast year seem to have been constructive and areworking. Based on my meeting with the CFO ofChong Hing Bank, whose common stock is held by theFund, mortgages continue to perform well andforeclosures are minimal.

In Shenyang, China, the commercial and residential realestate markets are much more competitive than inHong Kong. Our companies appear to have very goodlocations, but returns for the projects are likely to below initially. However, as has been the case in Shanghai,where leasing income has been increasing rapidly formany of our holdings, the returns should improve overtime. Importantly, these are not leveraged projects.

The Funds performance has improved so far in 2012,driven primarily by appreciation in our Hong Kong-basedsecurities. These securities drove the Funds poor perform-ance in 2011. However, as noted in previous letters, thissegment of the portfolio has generated an 83% cumulative

11


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return over the past seven years. The business performance

for these companies has been strong, and my visit to HongKong and Shenyang confirmed that this is likely to continuein 2012. Despite the recent appreciation, the securities con-tinue to trade at meaningful discounts from net asset value.

I shall write to you again when we publish our SecondQuarter Report dated April 30, 2012. Thank you for yourcontinued interest in the Fund.

Ian LapeyPortfolio Manager,Third Avenue Value Fund

12


17/83

13


At January 31, 2012, the end of the first fiscal quarter, theunaudited net asset value attributable to the 36,024,093

common shares outstanding of the Third Avenue Small-CapValue Fund Institutional Class (Small-Cap Value or theFund) was $20.98 per share, compared with the Fundsaudited net asset value of $20.17 per share at October 31,2011, and an unaudited net asset value at January 31, 2011of $21.28 per share, both adjusted for a subsequentdistribution. At February 28, 2012, the unaudited net assetvalue was $21.50 per share.

QUARTERLY ACTIVITY*

During the quarter, Small-Cap Value initiated five newpositions, added to 14 of its 63 existing positions,eliminated six positions and reduced its holdings in 27companies. At January 31, 2012, Small-Cap Value heldpositions in 60 common stocks, the top 10 positions ofwhich accounted for approximately 24.90% of the Funds

net assets.

Number of Shares New Positions Acquired

24,107 shares Alleghany Corp. Common Stock(Alleghany Common)

89,242 shares Compass Minerals International Inc.Common Stock (Compass Common)

74,250 shares Excel Trust Inc. 8.125% Preferred(Excel Preferred)

53,668 shares J&J Snack Foods Corp. Common Stock(J&J Common)

90,218 shares Transatlantic Holdings Inc. CommonStock (Transatlantic Common)

Increases in Existing Positions

79,500 shares Canfor Corp. Common Stock (CanforCommon)

15,306 shares Cimarex Energy Co. Common Stock(Cimarex Common)

175,650 shares Electro Scientific Industries Inc.Common Stock (ESI Common)

279,487 shares Electronics for Imaging, Inc. CommonStock (EFI Common)

53,702 shares Emcor Group Inc. Common Stock(Emcor Common)

55,004 shares Haemonetics Corp. Common Stock(Haemonetics Common)

8,150 shares Mantech International Corp. CommonStock (Mantech Common)

64,304 shares Pioneer Drilling Co. Common Stock(Pioneer Common)

2,079 shares SEACOR Holdings, Inc. Common Stock(SEACOR Common)

1,026,000 shares Segro PLC Common Stock(Segro Common)

Third Avenue Small-Cap Value Fund(Unaudited)

CURTIS R. JENSENCHIEF INVESTMENT OFFICER &PORTFOLIO MANAGER OFTHIRD AVENUE SMALL-CAP VALUE FUND

* Portfolio holdings are subject to change without notice. The following is a list of Third Avenue Small-Cap Value Funds 10 largestissuers, and the percentage of the total net assets each represented, as of January 31, 2012: Lanxess AG, 3.10%; Vail Resorts, Inc.,2.93%; Ingram Micro, Inc., 2.82%; Alexander & Baldwin, Inc., 2.56%; Seacor Holdings, Inc., 2.53%; Madison Square Garden,Inc., 2.39%; Liberty Media Corp, 2.19%; Mantech International Corp., 2.18%; Lexmark International Inc., 2.12%; and

Ackermans and Van Haaren NV, 2.08%.


18/83

Third Avenue Small-Cap Value Fund (continued)(Unaudited)


Number of Shares (continued)78,483 shares SemGroup Corp. Class A Common

Stock (SemGroup Common)

15,500 shares Sensient Technologies Corp. CommonStock (Sensient Common)

7,500 shares Teleflex Inc. Common Stock(Teleflex Common)

10,000 shares Westlake Chemical Corp. Common

Stock (Westlake Common)Positions Reduced

8,280 shares Ackermans & van Haaren N.V. CommonStock (AvH Common)

50,000 shares Aeropostale, Inc. Common Stock(Aeropostale Common)

50,000 shares Alexander & Baldwin, Inc.Common Stock (Alex Common)

3,397 shares Alico, Inc. Common Stock(Alico Common)

115,000 shares American Eagle Outfitters, Inc.Common Stock (American EagleCommon)

367,450 shares Arch Capital Group Ltd. Common Stock(Arch Common)

85,750 shares Bel Fuse Inc. Class B Common Stock(Bel Fuse Common)

26,602 shares Bristow Group, Inc. Common Stock(Bristow Common)

681,787 shares Cross Country Healthcare, Inc.Common Stock (Cross CountryCommon)

61,797 shares Encore Wire Corp. Common Stock

(Encore Common)

197,472 shares HCC Insurance Holdings, Inc. CommonStock (HCC Common)

97,695 shares ICF International, Inc. Common Stock(ICF Common)

Number of Shares Positions Reduced (continued)

144,167 shares Investment Technology Group, Inc.Common Stock (ITG Common)

98,200 shares JAKKS Pacific, Inc. Common Stock(JAKKS Common)

273,216 shares Kaiser Aluminum Corp. Common Stock(Kaiser Common)

161,992 shares Lanxess AG Common Stock(Lanxess Common)

146,485 shares Leucadia National Corp. CommonStock (Leucadia Common)

50,000 shares Lexmark International, Inc. CommonStock (Lexmark Common)

48,885 shares Madison Square Garden Co. Class ACommon Stock (MSG Common)

100,724 shares MEMC Electronic Materials, Inc.

Common Stock (MEMC Common)63,704 shares Minerals Technologies Inc. Common Stock

(Minerals Technologies Common)

207,770 shares Oshkosh Corp. Common Stock(Oshkosh Common)

285,148 shares Park Electrochemical Corp. CommonStock (Park Common)

173,869 shares P.H. Glatfelter Co. Common Stock

(Glatfelter Common)40,614 shares Stepan Co. Common Stock

(Stepan Common)

1,114,350 shares Viterra, Inc. Common Stock(Viterra Common)

59,528 shares Wacker Neuson SE Common Stock(Wacker Common)

Positions Eliminated

726,681 shares K-Swiss, Inc. Common Stock(K-Swiss Common)

25,465 shares National Western Life Insurance Co.Class A Common Stock (NWLI Common)

369,582 shares Pharmaceutical Product Development,Inc. Common Stock (PPD Common)

14


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Number of Shares Positions Eliminated (continued)

45,720 shares Synopsys, Inc. Common Stock(Synopsys Common)

25,823 shares Tejon Ranch Co. Common Stock (TejonRanch Common)

141,456 shares Tidewater, Inc. Common Stock(Tidewater Common)

REVIEW OF QUARTERLY ACTIVITY

Fund Management identified and initiated a number of newpositions during the quarter, but our energies tilted towardthe sales of holdings or resizing various positions, includingthe sale of Pharmaceutical Product Development (PPD)Common that was eliminated in connection with theleveraged buyout of the company. Synopsys Common wassold at a price approximating our estimate of fair value andfollowing the announcement by Synopsys that it intended to

acquire a competitor on terms we found unpalatable. Bothpositions had been positive contributors during theirrespective holding periods and were exited at attractive ratesof return. Of the five new positions initiated during thequarter four of them might be viewed as compounders,with above average growth potential embedded within eachone. These are discussed in some detail below, the commonthread in each case is a set of disappointments; but, ones

which we perceive to be temporary in nature or fixable. Suchresults put many companies out of favor withinvestor/speculators who focus, myopically, on short-termresults but provide opportunities for investors like the Fundwith longer-term investment horizons. The Funds smallposition in Excel Preferred is meant to complement theportfolios existing common stock investment in that realestate investment trust.

A portion of our idea origination process includes a reviewof current, publicly announced mergers and acquisitions from

15

1 On February 6, 2012 Transatlantic and Alleghany shareholders approved the merger. When the merger is completed, Trans-atlantic shareholders will receive a combination of cash and Alleghany stock.

2 The earthquake/tsunami in Japan, flooding in Thailand and earthquake in New Zealand, collectively, are estimated by Aon Ben-field to have insured losses of nearly US$ 60 billion. (By comparison Hurricane Katrina perhaps the most costly insured loss onrecord was estimated to have cost $67 billion.)

which we not only glean valuation data points but also

periodically find arbitrage opportunities where theinevitable shuffling of in-play securities occasionally resultsin temporarily mispriced assets. We believed that such was thecase with Alleghany Common and Transatlantic Common.Transatlantic, one of the worlds largest property casualtyreinsurance companies, appeared to be in play last autumnand the presence of competing suitors, partners and hostilebidders, combined with our industry knowledge, piqued our

curiosity. When Alleghany, a property casualty insuranceholding company whose stock had been on our wish list forsome time, announced that it and Transatlantic had agreed tomerge1 and saw its share price decline in reaction to theannouncement, our research wheels started to turn.

Industry conditions for both primary insurers and theirreinsurance counterparts have been under pressure in recentyears, suffering from both a softening underwriting

environment and record low interest rates. In turn, weakfundamentals have been reflected in industry valuations, asillustrated in the table below:

Source: Bloomberg, Third Avenue estimates

The property casualty industry recorded one of its worstyears on record in 2011, as insured losses and reinsurerswere similarly hit by the accumulation of globalcatastrophes2. As a result of their experiences in 2011,

Bloomberg N.A. Reinsurance Company Index - Historic P:B

(FFH CN, RE, PRE, AXS, RNR, TRH, VR, AHL, ENH, PTP, FSR)

Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10Dec-11

1.6

1.4

1.2

1.0

0.8

0.6

0.4

0.2

0.0


20/83


16

of salt in North America and the U.K., used for highway

de-icing and in various consumer and industrialapplications. Compass is also the leading North Americanproducer of Sulphate of Potash (SOP), a specialty fertilizerused for higher value added crops and of MagnesiumChloride. While it might be easy to dismiss these businessesas just another set of commodities, the companys assetsenjoy many favorable advantages:

Its various operations including the worlds largest salt

mine sit at the lowest end of their respective industrycost curves, critical in solidifying a low-cost advantageand enjoy a long life reserve base;

The companys salt segment benefits from anoligopolistic industry structure, where demand trendsare generally considered inelastic and where few cost-effective substitutes exist. Additionally the companystransportation infrastructure provides an added

advantage that is important in a product with a lowvalue/weight ratio;

Compass boasts one of only three all-natural solar SOPplants in the world (the others being in Chile and China);the companys highly energy-efficient facilities deliverfurther cost advantages within its served markets;

The company experienced a difficult confluence of events

in 2011 whose negative impact will undoubtedly linger intopart of 2012: In August a tornado struck its salt mine inGoderich, Ontario, damaging surface operations andcurtailing production; an unusually wet summer harvestseason at the companys Great Salt Lake evaporation plantdisrupted production of SOP; and mild weather within itscore service regions this winter weakened demand fordeicing salt. We view these setbacks, which have translated

into short-term margin pressure, as temporary in nature,though they highlight the weather sensitive nature of thebusiness.

If history rhymes in any way, the companys longer-termoutlook ought to be reasonably bright. The cash generativenature of the business has allowed the company to pay a

reinsurers have taken a firmer stance on pricing and early

indications suggest industry underwriting conditions appearto be improving, though it would be premature tocharacterize the gradual improvement as a hard market.The chart below from Guy Carpenter (www.guycarp.com)neatly describes this bad news is good news cycle that thereinsurance industry tends to experience over time.

Both Alleghany Common and Transatlantic Common werepurchased at wide discounts to book value, a metric that weview as a reasonable proxy for economic or intrinsic valueof the businesses and that ought to provide a measure ofdownside protection. Management teams in both cases haveproven to be disciplined underwriters and above averagecapital allocators, resulting in attractive compounding in pershare book values, despite the inherently commodity like

characteristics of the business. Alleghany, in particular, hasa reputation as a conservative, albeit opportunistic andsometimes contrarian, investor that may be more assertivewith Transatlantics $13 billion investment portfolio.

In sum, we believe (i) share valuations as reflected by thepublic markets have overly discounted industry conditionsthat may be on the mend; (ii) little to no credit is attributedto managements ability to successfully invest its vast

portfolios over time; and (iii) our alignment with like-minded, owner-managers, coupled with a very strongbalance sheet, improves the odds of preserving and growingour capital with a modicum of investment risk.

Compass Minerals is a producer of salts, fertilizer andmagnesium chloride. The company is the leading producer

LONG-TERM EVOLUTION OF SHAREHOLDERS FUNDS FOR

THE GUY CARPENTER GLOBAL REINSURANCE COMPOSITE

Source:Guy Carpenter & Company, LLC

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

9M11

USD

Billions

180

160

140

120

100

80

60

So Market

Hard Market

Hard Market Soening

Crisis

Excess Capital


21/83

17

healthy and growing dividend while maintaining a strong

balance sheet. Compass management has been steadilyinvesting in its productive capacity in a multi-year programthat ought to not only enhance its cost structure but alsocontinue to raise the companys future earnings and cashgeneration capacity. We believe our entry point in thestock in the high $60s incorporated much of theaforementioned short-term bad news, but gives little creditto the companys irreplaceable assets, stability, returns and

longer-term growth prospects. Compass Common wasinitially purchased at a modest discount from ourconservative estimate of net asset value and a moremeaningful discount to what we believe a knowledgeableand reasonable industrial buyer might pay for control of thebusiness.

J&J Snack Foods manufactures you guessed it snackfoods and distributes frozen beverages to a wide range of

food service and supermarket customers nationwide.Management believes that the company is the largestmanufacturer of soft pretzels in the United States, Mexicoand Canada, which it sells under more than a dozendifferent brand names. Other snacks include burritos,churros, cookies and pies. The company also markets frozendrinks under names such ICEE, Slush Puppie and ArcticBlast. J&J generates ancillary business from the sale and

maintenance of equipment for its customers, includingovens, display cases and frozen beverage dispensers.

It is not a sexy business, but it seems to work: since itsfounding more than 40 years ago, the company has beenprofitable in every quarter; diluted earnings per share havecompounded at nearly 13% annually during the past 10years; and the dividend has increased every year since itsinception, six years ago. Management has accomplished all

of this while keeping the balance sheet debt free and issuingvirtually no equity. With a 21% ownership stake in thecompany, Founder, Chairman and CEO Gerald Shreiber

would appear to fit the owner-manager that Third Avenue

seeks in its investments.But cheap stock prices and good news rarely go hand inhand. Our opportunity to build a position and the Fundonly has a modest position at this point arose coincidentwith the company announcing disappointing results in itsmost recent quarter. Among other culprits were significantlyhigher ingredient and packaging costs and weakness incertain product lines. Management has announced its intent

to raise prices, but these will undoubtedly take time toimpact the companys bottom line. J&J appears to be acompounder but one that has temporarily stumbled.

PORTFOLIO POSITIONING, INVESTING OBSERVATIONS

There must be some kind of way out of here,Said the joker to the thief,Theres too much confusion,

I cant get no relief. All Along the Watchtower3

As we step back and survey the broader investmentlandscape, we can sympathize with those who admit tobeing a tad confused about the macro picture. Forinstance, does Eurozone insolvency put us on the edge ofanother financial collapse? Is there more likely to be

inflation or deflation? Will the Feds interest ratesuppression strategy help the global economy? It would beeasy to let such topics consume an investment analysis.While our approach attempts to reasonably handicap theinfluences such macro developments may have on any giveninvestment, we steadfastly avoid the urge to makepredictions around such and, more importantly, try not tolet it paralyze us. While remaining macro aware when itcomes to investing, the starting point for Third Avenuesinvestment philosophy might be described as expecting theunexpected. Focused on the micro considerations of aninvestment, this means:


3 Originally written and recorded by Bob Dylan, the song quickly became identified with Jimi Hendrix whose interpretation, byvirtue of Hendrixs distinctive guitar playing, carried a more haunting sense of cataclysm than Dylans original version.


22/83


(i) Identifying companies with strong balance sheets whose

financial strength will cushion the business during timesof economic duress and can create a competitive edgefor the management team;

(ii) Aligning ourselves with like-minded executives whoseincentives encourage them to focus on the long-termdevelopment of the business while acting in the bestinterests of passive, minority shareholders like the Fund;

(iii)Insisting on a margin of safety and protecting thedownside by buying securitiesonly when they trade at ameaningful discount to theunderlying economic value ofthe asset;

(iv) Holding investments incompanies whose businesses

we understand and which havemultiple attractive avenues forgrowth over our investmenttime horizon.

Translated into the portfolio todaywe note two importantcharacteristics of the Funds newinvestments in the past year or two:

Have been dominated by U.S.companies. While our preferencehas always been to favor U.S.-domiciled companies, our under-lying belief is that (i) the U.S.economy remains among themost resilient in the world, affording domesticcompanies a cushion against inflationary headwinds in

Asia and Latin America and deflationary forces inEurope; (ii) U.S. companies (aided and abetted by aweak currency) may be good takeover bait for foreignbuyers looking to buy, for example, natural resources,technology or brands; (iii) the U.S. may be in the firststages of a renaissance in its manufacturing base as

abundant and cheap natural gas resources helps to level

the competitive playing field; Hold a lot of optionality, mostly by virtue of their super

strong financial positions that allows the managementteams extraordinary flexibility. For example, seven of theFunds holdings initiatedcash dividends in the past year.Importantly, these dividends do not harm the balancesheet or impinge on the ability to undertake growthinvestments and to maintain a proper level of investment

in the business. In other cases,optionality equates to resourceconversion, i.e., refinancing ofliabilities or sale of assets. Forexample, Semgroup, the operator ofoil and gas midstream assets, createda publicly-listed entity from whathad been an illiquid ownership in

one of its crude oil pipelines,enhancing its value for Semgroupshareholders.

Todays low interest rates penalizesavers and encourage speculators.Western governments have and willcontinue to debase their currenciesand finance non-productive

activities with more and more debt.On the other hand, small signs ofimprovement in the U.S. economyand the growing belief that Chinawill manage its large, controleconomy into a soft landing lead

us to believe that global equities were oversold in 2011,hence the recovery in the fourth quarter that has stretched

into the early weeks of 2012. That said, macro issues remain(ahem, Europe) that could reignite volatility in risk assets atany moment. Our view is that the global economy isgenerally improving but that it pays to be prepared for theworst even while we hope for the best. We do this byinvesting only in companies with the financial stability toweather any temporary shocks, even if they are extremely

18

Our view is that the globaleconomy is generally

improving but that it pays to beprepared for the worst even

while we hope for the best. We

do this by investing only incompanies with the financial

stability to weather anytemporary shocks, even if theyare extremely severe, and by

focusing on long-term

investment results, a view thathelps us remain patient during

short-term declines.


23/83

19

severe, and by focusing on long-term investment results, a

view that helps us remain patient during short-term declines.One investment that epitomizes this philosophy was theaforementioned PPD, which we sold when The CarlyleGroup offered to buy the company at a 30% premium tomarket value and a substantial premium to our cost basis. Weadded PPD to the portfolio in the middle part of the lastdecade. We saw a financially strong, well-managed andresilient pharmaceutical company that we knew we could

stand by for the long term. When PPDs stock price declinedsharply in 2009, we reassessed the company and added to ourposition. That turned out to be the right move as the majorityof our returns (mid-20s IRR to the Fund) were earned sincethat period, where we bought a good company on priceweakness. In 2010, PPD spun-off Furiex Pharmaceuticals,monetizing an asset that the Fund was then able to sell. Then,a little more than a year later, PPD became an acquisition

target. Our in-depth knowledge of the company and

willingness to take the long view, even in the face of pricedeclines, is what made the investment such a success for theFund.

I look forward to writing you again when we publish ourSecond Quarter report dated April 30, 2012. Thank youfor your continued support.

Sincerely,

Curtis R. JensenChief Investment Officer andPortfolio Manager,Third Avenue Small-Cap Value Fund



24/83

20


At January 31, 2012, the end of the first fiscal quarter of2012, the unaudited net asset value attributable to the

69,981,912 shares outstanding of the Third Avenue RealEstate Value Fund Institutional Class (the Fund) was$22.24 per share. This compares with an audited net assetvalue of $21.45 per share at October 31, 2011, and anunaudited net asset value of $23.63 per share at January 31,2011. At February 28, 2012, the unaudited net asset valuewas $23.98 per share.

QUARTERLY ACTIVITY*

The following summarizes the Funds investment activityduring the quarter:

Number of Shares New Positions Acquired

9,661,263 shares Centro Retail Australia Common Stock(Centro Common)

63,254 shares Rouse Properties, Inc. Common Stock(Rouse Common)

Number of Shares

or Notional Amount New Positions Acquired (continued)

AUD 130 million Australian Dollar Calls expires 3/7/12(Aussie Calls)

AUD 130 million Australian Dollar Puts expires 3/7/12(Aussie Puts)


1,220,950 shares City Developments Ltd. Common Stock(City Developments Common)

3,487 shares Derwent London Plc Common Stock(Derwent Common)

212,059 shares First Industrial Realty Trust, Inc.Common Stock (First IndustrialCommon)

2,087,068,261 Japanese Yen/U.S. Dollar ForwardForeign Currency Contracts(JPY/USD Forward)

Positions Reduced

746,648 shares Bellway plc Common Stock

(Bellway Common)

Third Avenue Real Estate Value Fund(Unaudited)

MICHAEL H. WINERCO-PORTFOLIO MANAGER OFTHIRD AVENUE REAL ESTATE VALUE FUND

* Portfolio holdings are subject to change without notice. The following is a list of Third Avenue Real Estate Value Fund's 10largest issuers, and the percentage of the total net assets each represented, as of January 31, 2012: Forest City Enterprises, Inc.,7.26%; Brookfield Asset Management, 5.23%; Lowe's Cos., Inc., 4.82%; Cheung Kong Holdings, Ltd., 4.82%; HammersonPLC, 4.63%; Sun Hung Kai Properties, Ltd., 4.06%; Wheelock & Co., Ltd., 3.57%; Weyerhaeuser Co., 3.44%; Taylor WimpeyPLC, 3.42%; and Vornado Realty Trust, 3.24%.

JASON WOLFCO-PORTFOLIO MANAGER OFTHIRD AVENUE REAL ESTATE VALUE FUND


25/83

Third Avenue Real Estate Value Fund (continued)(Unaudited)

Number of Shares Positions Reduced (continued)

526,415 shares Berkeley Group Holdings plc CommonStock (Berkeley Common)

350,000 shares Lennar Corp. Common Stock(Lennar Common)

Positions Eliminated

888,000 shares Mitsubishi Estate Co. Ltd. CommonStock (Mitsubishi Common)

923,000 shares Mitsui Fudosan Co. Ltd. Common Stock

(Mitsui Fudosan Common)

DISCUSSION OF QUARTERLY ACTIVITY

During the quarter the Fund acquired two new commonstocks (Centro Common and Rouse Common, discussedbelow) and increased its position in City DevelopmentsCommon, taking advantage of recent volatility in Asianproperty stocks and averaging down the Funds cost basis.

Additionally, the Fund eliminated the common stocks of twoJapanese real estate operating companies (MitsubishiCommon and Mitsui Common). Despite these two stockstrading at substantial discounts to net asset value (NAV),Fund Management determined that the Funds capital couldbe better allocated to investments that are not dependent upona general recovery of the morose Japanese equity markets.Furthermore, Fund Management has becomefrustrated with

Japanese corporate governance and the reluctance of manycorporate boards to take reasonable actions that wouldstimulate interest in their stocks (e.g., share repurchases, higherdividends, mergers and acquisitions, etc.). The Fund alsotrimmed its holdings in three housing-related common stocks,taking profits as the market values appreciated substantially.

The Fund acquired Centro Retail Australia common shares(Centro Common) in exchange for its holdings in Centro

Properties Group (CNP) senior bank debt, which itpurchased earlier in the quarter. CNP was an Australian-based real estate investment trust (REIT) that expandedaggressively in the 2004-2007 timeframe, amassing aportfolio of more than 700 shopping centers in Australiaand the United States. Most of these properties were

acquired at top dollar and financed with short-term

borrowings a strategy that forced CNP to seek relief fromcreditors and undertake a significant restructuring in late2007. With nearly $18 billion of debt outstanding andnumerous stakeholders across its corporate structure, CNPsreorganization was incredibly complex and essentially leftthe company at a standstill for four years. Meaningfulprogress was made last year, as the companys debt tradedout of original lenders hands, and the new creditor groupaccelerated the reorganization process. As the first step inits reorganization, CNP sold its U.S. shopping centerportfolio to Blackstone for more than $9 billion and madea cash distribution to its senior creditors with the proceeds.The second step was converting the remaining creditorclaims to equity in a new company Centro Retail. Thisnewly-formed company is solely focused on the ownershipand management of CNPs legacy shopping center portfolioin Australia. The company has a vastly improved financial

position, steady cash flows from its 99% leased shoppingcenter portfolio and reduced debt levels (roughly 40% ofappraised value). The company has attracted a newmanagement team that is incentivized to maximize valuefor shareholders.

By purchasing CNPs senior bank debt and exchanging itfor Centro Common upon the emergence of the newcompany, the Fund was able to back in to a sizableposition in Centro Common at prices that represent abouta 30% discount to our conservative estimate of currentNAV. In Fund Managements view, Centro Retail is wellpositioned to increase the underlying NAV quite rapidly asit (i) undertakes redevelopment opportunities that wereneglected during the restructuring process, (ii) renegotiatesrents to market rates (during the restructuring the companyprimarily extended existing terms just to keep tenants in

place), and (iii) takes advantage of its improved credit profileto refinance its high cost debt at lower rates. In addition, itseems likely that the large discount, at which we estimateCentro Common trades relative to NAV and its peers,should narrow after inclusion in the major global real estateindices later this year. If the discount does not dissipate, we

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believe the company would be a likely candidate for a

takeover bid, as its retail platform would be highly covetedby a number of institutional and strategic investors. Similarto the Funds other investments in Australian REITs, theFund is getting paid to wait for the underlying values tobe recognized by either public or private marketparticipants. In Centros case, the Fund is earning a 7%annualized dividend yield on its original investment.

In its continuing efforts to become a top-tier mall REIT,

General Growth Properties spun off a 30-property portfolioof lower productivity malls. The spin off was completed bydistributing common shares of Rouse Properties, pro rata,to General Growths shareholders (including the Fund).General Growth Common is a 1.7% position in the Fund.As a standalone REIT, Rouses strategy will be to repositionits underperforming mall portfolio by renovating existingspace, expanding space for new tenants, reconfiguring the

existing tenant base, and extending out shorter-term leaseson more attractive terms. Rouses portfolio generallyconsists of regional malls in one mall towns. Theprospects that a new mall will be built to compete with oneof these malls is highly unlikely. In order to fund itsrepositioning efforts, Rouse will seek to raise approximately$200 million through a rights offering later this year. Overthe longer term, Rouse could have an opportunity to createadditional value by acting as a consolidator in the class-Band C malls or, once the portfolio is stabilized, it might bean attractive acquisition candidate for another mall REITor institutional investor. Fund Management is still assessingthe quality of the companys portfolio and the newmanagement teams strategy in order to determine if theFund will participate in Rouses capital raise. Irrespective ofwhether or not the Fund acquires a larger stake in RouseCommon, Fund Management believes the spin off

enhances the future prospects for General GrowthProperties, as its sole focus will be on its higher quality malls.

PORTFOLIO POSITIONING

Third Avenues investment approach is often described asunconventional and unconstrained. We believe this is true,

and the only prudent way to invest capital within a sector

that is dominated by relative value investors. One of thechallenges of investing with an unfettered mandate isexplaining our portfolio positioning to shareholders who maybe more familiar with the standard real estate industry jargonof overweighting and underweighting geographies or sectorsagainst an index. Our investment approach is very different,involving specific stock selection criteria based on bottom-up fundamental analysis of individual securities (withoutregard to weighting in an index), with the goal of constructinga portfolio that can generate above-average long-term returnswith limited risk of permanent impairment of capital.

The last six months was one of the most active investmentperiods in the Funds history. The Funds cash balancedecreased from 16.3%, at July 30, 2011, to 4.5%, atJanuary 31, 2012. At its current cash level, FundManagement views the Fund as being fully invested and we

are excited about the prospects for our investments. Findingvalue in real estate securities (particularly REITs) is notpervasive today. We have to dig deep to find suitableundervalued securities and accept what we deem to bemanageable risks (primarily market risk). This requires adisciplined and selective temperament with a long-term(three to five year) investment holding period. The portfoliois currently invested among four distinct investmentthemes, each of which Fund Management believes offersreal estate securities investors exceptional value: (1) CoreBlue Chips, (2) Asian Growth, (3) Housing Related and(4) Special Situations.

1. Core Blue Chips: Common stocks of real estateoperating companies (REOCs) or REITs that ownhigh quality assets in global gateway cities and havemanagement teams with proven track records of

creating value for shareholders. Examples of Core BlueChips include Forest City Common (U.S.), BrookfieldCommon (Canada), Hammerson Common (U.K.),Vornado Common (U.S.) and Westfield Common(Australia). At quarter-end, Core Blue Chipsrepresented approximately 28% of the Funds net assets,delineated by country as follows:

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United States 12.2%

United Kingdom 5.8%Canada 5.2%Australia 3.0%Hong Kong 1.8%

Most of the Core Blue Chips have been long-timeholdings in the Fund. Brookfield Common andVornado Common have both been significantcontributors to the Funds performance over the past

ten years and Fund Management expects they willcontinue to provide above-average returns goingforward. On the other hand, Forest City Common hasbeen the Funds largest detractor to performance overthe last few years, despite the fact that it trades at a 35%discount to our conservative estimate of NAV (as ofJanuary 31, 2012). The Funds investment in ForestCity Common was discussed in detail in last quarters

letter to shareholders. Forest City recently announcedseveral strategic initiatives that are consistent with therecommendations noted in the Schedule 13D filed byFund Management in October 2011. Since the 13Dfiling, Forest City Common has appreciated 48.7%,through February 28, 2012.

2. Asian Growth (at a steep discount): Common stocksof extremely well-financed Asian REOCs that have

historically generated double-digit, compounded NAVgrowth. Examples of Asian Growth companies in theFund include Cheung Kong Common, Sun Hung KaiCommon, Henderson Common, Hong Kong LandCommon, Hysan Common, Wheelock Common andCapitaLand Common. Despite superior growthprospects over the next three to five years, the commonstocks trade at steep discounts to conservative NAV

estimates. At quarter-end, Asian Growth companiesrepresented approximately 23% of the Funds net assets,delineated by country as follows:

Hong Kong 19.1%Singapore 4.3%

The Fund has been investing in several well-financed

Asian REOCs for over six years. Long-term holdings,such as Henderson Land, Hysan Development, HongKong Land and Wheelock & Co., have all beensubstantial contributors to the Funds performance.Notwithstanding their long-term contributions, eachsecurity trades at a substantial discount to NAV, whichwe believe will continue to compound at above-averagerates. Cheung Kong and Sun Hung Kai are bothrelatively new additions to the portfolio and have notyet been contributors (or significant detractors) to theFunds performance.

3. Housing Related: Common stocks of well-financedU.S. and U.K. companies whose businesses aresignificantly tied to homebuilding, land developmentand/or building products. Examples of HousingRelated securities in the Fund include: Lennar

Common, Newhall Common, Lowes Common, TaylorWimpey Common and Weyerhaeuser Common. Eachof these securities was purchased at depressed valuationsand stands to benefit tremendously from the ultimaterecovery in the U.S. and U.K. housing markets (whichappears to have begun). At quarter-end, HousingRelated companies represented approximately 21% ofthe Funds net assets, delineated by country as follows:

United States 16.0%United Kingdom 5.4%

Most of the Funds Housing Related investments weremade when the securities were priced at levels reflectingthe severe downturn in U.S. and U.K. housing markets.These contrarian investments have started to generatedecent returns for the Fund as the markets seem to berecognizing the beginning of a housing recovery.

Lennar, Lowes, Taylor Wimpey, Berkeley Group andBellway are examples that have each been solidcontributors to recent performance. One HousingRelated investment (Newhall Land) has yet to providea positive return to the Fund. Newhall is a 2.5%position in the Fund and is currently priced at 49%below the Funds cost. Newhalls primary asset is a

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master-planned community consisting of

approximately 20,000 residential lots and land forcommercial development. The project is locatedapproximately 30 miles north of downtown LosAngeles in Valencia, California. It is one of the fewremaining master-planned communities in Los AngelesCounty and is expected to be one of the primaryproviders of residential lots for homebuilders over thenext 20 years. Depending upon market demand,Newhall expects to begin selling lots to homebuildersby 2014. However, the company does not currentlygenerate any meaningful cash flow (in fact, it will be anet user of cash for several years, as entitlementprocessing continues and land developmentcommences), and the equity securities are thinly traded.Approximately 85% of the equity is controlled by sixinvestors, including the Fund, Lennar Corp. and fourprivate equity/hedge funds (that each charge

substantially higher management fees than the Fund).As a result, it is difficult for market participants to valuethe company and even more difficult to acquire ameaningful stake. Newhalls current enterprise value(based on its trading price) is approximately $375million. While pre-financial crisis valuations may notbe totally relevant today, this valuation compares toNewhalls appraised value of $2.7 billion in 2007 (prior

to its Chapter 11 bankruptcy filing and reorganization).It is possible that the Funds investment in Newhall willgo unrecognized for a while longer. But as the Californiahousing market recovers (which it always does),Newhall is destined to be ground zero forhomebuilders seeking buildable lots in Los AngelesCounty as there is literally almost no place else to go.The Funds investment in Newhall has several potential

catalysts for value realization, including: (a) an IPO, (b)sale to a strategic buyer, or (c) a merger or acquisitionwith a publicly-traded company.

4. Special Situations: Common stocks or debt securitiesof companies in real estate or related industries (e.g.,REITs, REOCs, homebuilders, etc.) that are not

necessarily viewed by Fund Management as long-term

core holdings. Generally, they were purchased atsubstantial discounts to NAV, with the thesis that thevalue will ultimately be recognized by the publicmarkets or the company is a likely candidate for aresource conversion event (e.g., takeover, corporatereorganization, sale of significant assets, major sharerepurchases, etc.). Examples of Special Situations in theFund include First Industrial Common (U.S. REIT),Dexus Common (Australian REIT), Centro Common(Australian REIT), Songbird Common (U.K. REOC),Segro Common (U.K. REIT) and Hovnanian SeniorSecured Notes (U.S. homebuilder). At quarter-end,Special Situations represented approximately 24% ofthe Funds net assets, delineated by country as follows:

Australia 7.6%United States 7.3%

United Kingdom 6.2%Japan 1.4%Hong Kong 1.1%

Most of the Funds Special Situation investments arerelatively recent. A few have already generated positivereturns including First Industrial and Centro, whileseveral have been a drag on performance includingSongbird and Segro. First Industrial is a U.S. REIT that

owns a portfolio of industrial properties. The Fund firstacquired First Industrial Common in August 2010 withthe thesis that if the company was unable to reduce itsdebt load through property dispositions, the Fundwould be willing to assist the company by making asubstantial equity infusion. It turned out that thecompany was able to solve its leverage issues on its own.The stock has since appreciated substantially, but still

trades at a discount to NAV. On the other hand, theFunds investment in Songbird Common has been adrag on performance. Songbird owns a 70% stake inCanary Wharf Group, which owns 8 million square feetof prime office and retail properties in East London.Songbird Common is publicly traded, but theownership is concentrated in four institutional

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investors, including two sovereign wealth funds, a large

private equity fund and a wealthy New York family. The30% of Canary Wharf that is not owned by Songbirdis controlled, in large part, by Brookfield AssetManagement (one of the Funds largest holdings).Songbird Common trades at roughly a 40% discount toconservative NAV estimates but, primarily due to itscomplex corporate structure, the discount has persistedand widened. Our thesis (which so far has not pannedout) is that all parties have acommon interest to increaseshareholder value and asimplified corporate structure(or possibly a going privatetransaction) would crystalizevalue and eliminate thediscount. Value realization is nodoubt taking longer than

anticipated, but we believe aresolution is a matter of whennot if. In the meantime,NAV has and should continueto grow, as Canary Wharfdeploys its nearly US$2 billioncash hoard into newdevelopments on the property

(for which is has entitlementsto develop an additional 6million+ square feet).

The portfolio construction processis dynamic. The Fund will likelyown Core Blue Chips and Asian Growth companies for theforeseeable future. However, Housing Related and SpecialSituations are generally more opportunistic and the Funds

weighting in these themes may vary dramatically from yearto year. The vast majority of the Funds peers tend to focuson common stocks that are represented and heavilyweighted in their designated benchmark. As a result, theirportfolios tend to be concentrated in the universe of REITsand REOCs that comprise the benchmark. The Funds

investments in Housing Related and Special Situations, as

well as our willingness to concentrate in Blue Chips andAsian Growth companies, differentiate the Fund from itspeers. Instead of settling on investments in mediocrecompanies, Fund Management has the latitude to makeopportunistic investments in nontraditional securities thatoffer unique return profiles. When Fund Managementbelieves there is a lack of investable securities (at cheapenough prices), the Fund may take a more conservative

position, by holding cash andtaking advantage of marketvolatility by writing covered callsand selling out-of-the-money puts(as it has done in the past), whilewaiting for opportunities to arise.

As illustrated above, eachinvestment theme has its share of

winners and losers. FundManagement continuouslychallenges its investment thesis(including NAV estimates, growthprojections, financial condition,etc.) on each security in theportfolio. Securities that havesubstantial unrealized gains arecandidates for sale, especially ifmarket prices approach NAV andgrowth prospects becomeuncertain. Likewise, securities withunrealized losses may be candidatesfor sale, if it is determined that our

thesis was incorrect, there is a permanent impairment ofvalue, or other securities are identified that offer morefavorable risk-adjusted returns. The recent sale of Mitsubishi

Common and Mitsui Common are examples of securitiesthat were sold (realizing losses) because our thesis onJapanese investme

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